US tariff-induced lower demand for German goods and services as well as unfavourable currency dynamics – particularly with the euro appreciating by around 15% in the first half of the year – means that exporters with a high share of US dollar (USD)-denominated sales no longer have a natural earnings tailwind.
AI adoption supports operational efficiency
Meanwhile, the diffusion of AI-driven automation and digitalisation is gradually filtering into core German industries, providing incremental support.
While Germany is not viewed as a pure technology powerhouse, many DAX names – from industrial automation specialists to advanced manufacturers – are beginning to realise meaningful efficiency gains. These incremental improvements support margins and help cushion the cyclical downturn that has characterised much of 2023-2024.
The adoption of automation and digital technologies represents a structural shift that could provide sustained competitive advantages.
ECB easing provides supportive backdrop
On the policy front, the European Central Bank (ECB) might at present be reticent – but has scope – to ease further in 2026 without jeopardising its disinflation progress.
Eurozone inflation, which fluctuated between 1.9% and 2.5% during 2025, hovered around its 2% central bank target rate during the second half of the year.
With inflation expectations anchored and growth still subdued across the bloc, policymakers have room to continue cutting rates gradually.
A gently easing policy mix provides a constructive foundation for equities – particularly for interest-rate-sensitive sectors such as real estate, financials, and domestically leveraged companies that suffered disproportionately during the tightening cycle.
Valuation discount presents opportunity
Concerns over valuation should not be exaggerated. The DAX 40 trades at a price to earnings ratio (P/E) of around 17, placing it well below US benchmarks such as the S&P 500 (near 25×).
This gap has persisted despite improving earnings visibility, reflecting Germany’s cyclical sector composition – heavy in autos, industrials and financials, sectors that traditionally trade on lower multiples – rather than structural weakness.
Yet these industries continue to generate robust cash flows, relatively high dividends, and maintain solid balance sheets.
The concentration of returns in autos, industrial technology, and chemicals simply reflects where Germany’s durable earnings power lies.
Improved conditions support higher path
With fiscal uncertainty around Germany’s budget largely resolved for now, and with corporate buybacks increasing in frequency among DAX constituents, liquidity conditions have improved.
The path of least resistance for the DAX in 2026 thus remains higher, supported by both fundamental and technical factors.
Pullbacks will, of course, occur. But the combination of steady earnings, improving policy conditions, and strong corporate fundamentals argues in favour of treating weakness as opportunity.
The bull cycle that began in late 2022 still appears to have room to run despite the sideways consolidation seen since June.
Volatility expected to return
The unusually steady uptrend seen in the DAX 40 since its 7,545 April low will not persist indefinitely. Volatility will return at some stage in the new year.
Market participants should remain prepared for sharper moves – both down and up – as the DAX 40 once more tries to breach psychological resistance levels.
The 2026 journey is likely to be choppier than recent experience, requiring active management and appropriate risk controls.
Nevertheless, the fundamental case for German equities remains intact supported by multiple positive factors.
Technical analysis of the DAX 40
The DAX 40 – up around 19% year-to-date – remains in a medium-term sideways trading range. While its November low at 22,963 underpins, the long-term uptrend is deemed to stay intact.